No authority yet to listen to depositors' complaints
No authority yet to listen to depositors' complaints

You can complain about unregulated deposit schemes, but no authority to go to

  • A competent authority to hear depositor complaints is yet to be created
  • A competent authority can provisionally attach property of unregulated deposit takers based on complaints

Mumbai: The government on 12 February issued a notification allowing depositors to complain about unregulated deposit schemes to a ‘competent authority’.

This was allowed under the Banning of Unregulated Deposit Schemes Act, 2019, on the basis of which, a competent authority can provisionally attach assets.

The Act was introduced as an ordinance in February 2019 and subsequently enacted into a law by Parliament on 31 July, 2019. However, nearly a year after its passage, a competent authority to hear depositor complaints is yet to be created, say experts.

According to the 12 February notification, depositors and non-depositors can complain about unregulated deposits to the competent authority. An unregulated deposit is one which is not sanctioned by a regulator such as Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development (Irda) Authority, Employees Provident Fund Organization (EPFO), Reserve Bank of India (RBI), Pension Fund Regulatory and Development Authority (PFRDA), National Housing Board (NHB), and the ministry of corporate affairs.

The first schedule to the Act enumerates regulated deposit schemes and includes instruments not conventionally thought of as deposits such as mutual funds and PMS schemes as well as public deposits raised by non-banking finance companies (NBFCs) which are regulated by the RBI.

The competent authority can also provisionally attach the property of unregulated deposit takers, based on such complaints. The notification requires the competent authority to maintain a public database of deposit takers and the status of proceedings, if any, against them including restitution of depositors.

The Banning of Unregulated Deposit Schemes Act, 2019 has been challenged in the Supreme Court by clients of Karvy Private Wealth who advanced loans to builders introduced to them by Karvy. Investors have contended that the Act failed to help depositors of schemes that came into existence before the commencement of the Act and that it accords priority to corporate creditors under the Insolvency and Bankruptcy Code (IBC) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFESI Act) over retail depositors. You can read more about this here (https://bit.ly/2vFMmLQ).

“No competent authority has been set up under the Banning of Unregulated Deposit Schemes Act," said advocate Srijan Sinha, a lawyer representing the Karvy clients, in the Supreme Court.

The Act says that an authority will be set up for union territories without legislatures by the central government and for states by respective state governments. In case of Puducherry and Delhi, the competent authority shall be set up by the governments of those areas. The failure to set up a competent authority is one of the issues raised by Karvy clients in their petition in the Supreme Court.

"Without a competent authority, the Banning of Unregulated Deposit Schemes Act is redundant, and so is this notification," said Sinha.

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